April 15th, 2011

How Key is Your Car’s APR?

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**Today’s guest post is contributed by MoneyAisle.**


Car financing eases the blow of buying a new or used vehicle by allowing consumers to put money down and borrow the rest, rather than pay cash in full.

When shopping for a car loan, many consumers commonly believe that monthly affordability should be the only concern in order to avoid the risk of defaulting on payments. Your monthly payment is important, but your APR is just as crucial.

What’s the Big Deal?

An interest rate, for all loan types, is the rate at which interest is paid by the borrower for the use of money borrowed from a lender. APR, or Annual Percentage Rate, takes closing costs and fees into account and creates an accurate idea of the actual costs of any financing offer, including all of the hidden charges. Therefore, the higher your interest rate and APR, the more additional money you are paying back to the lender over the life of your loan.

Approximately 80% of auto loan transactions are financed at a dealership, where, more often than not, the interest rates are marked up by at least 2-6%. Additionally, the advertised rates of 0-1% are only available for those with super-prime credit, which is only 15% of the U.S. population—meaning most consumers leave the dealership without the best rate for their credit profile.

How Low Can You Go?

It’s vital to do your research while car shopping to ensure the lowest interest rate and APR possible. The best way to calculate the APR for the car you want to purchase is to look at the amount of the monthly payment, the interest rate, how many months it will take for you to pay off the loan, and the total payoff amount.

Once you have a better idea of the total to be repaid, it is important to determine your loan term. Many people choose a longer loan term to keep their monthly payments at their lowest, but it increases the amount of interest to be paid back.

Another very important consideration is your credit score and borrowing history. Get your free credit report once a year from all three credit bureaus through AnnualCreditReport.com. Then, watch for changes in your credit score, a three-digit numerical representation of your credit report, through Credit Karma’s free credit score monitoring resource. Also, keep in mind that your score and history should be as squeaky clean as possible before shopping for a car loan—because your interest rate is tied directly to it.

What next?

Take your time when it comes to financing your next car purchase. The better shape your credit is in and the more you understand the true costs including all of the hidden fees, the smarter your decision will be. Plus you’ll be more prepared to negotiate your best interest rate and APR.

MoneyAisle.com allows the once tedious undertaking of finding the best interest rate on car loans and refinanced car loans to become efficient, simple, and organized by putting the entire experience in one online location where over 160 financial institutions bid for your business. Without any personal information required, consumers are empowered to find the best interest rate hassle-free.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.

One Comment

  1. How about the reasoning behind “How High do you need to go?” … Do you really NEED a brand new car at full price, or can you sacrifice a few years and 30-40k miles for a car that would be 30-40% (or more) cheaper than new?

    Martin at 2:32 pm on April 15, 2011

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